In contrast to a traditional IRA, where the account custodian often restricts you to approved asset types, a self-directed individual retirement account (SDIRA) allows you to invest in a wider choice of assets.
With more options available, you can diversify your retirement investing by using non-traditional assets like precious metals or real estate.
You have total control over your investing strategy with an SDIRA, but there is also more complexity and risk. A self-directed IRA has complex regulations, and if you don’t strictly adhere to them, you can run into problems at tax time.
What Exactly is a Self-Directed IRA?
An IRA that can be used to invest in nontraditional assets is a self-directed IRA. The normal IRA contribution limitations and tax benefits apply to self-directed IRAs, which can be set up as traditional or Roth IRAs.
With a traditional SDIRA, you pay taxes on the permitted withdrawals as well as the contributions you make to the account. A Roth SDIRA is taxed in the reverse way; qualifying withdrawals aren’t taxed, but contributions aren’t deductible.
The funds from a self-directed IRA can be used to buy shares of private companies, real estate, cryptocurrency, precious metals, and other investments. However, you’ll need to traverse some complicated rules when making these kinds of investments.
For instance, you might want to use SDIRA funds to buy gold, silver, or platinum coins that you’ll store in your SDIRA as investments. However, if the IRS classifies the precious metals as a collectible, making the purchase with an SDIRA account may be seen as a taxed withdrawal.
Because of the complexity involved, if you insist on using a self-directed IRA, you should consult a financial advisor and a tax expert to assist you understand the effects of your investment decisions.
Limitations on Self-Directed IRA Contributions
The prerequisites for making contributions to a self-directed IRA are identical as those for regular IRAs.
The annual IRA contribution cap for 2023 is $6,500 for people under 50 and $7,500 for people over 50. Rollover contributions are not subject to these restrictions.
Your filing status and modified adjusted gross income (MAGI) for the year determine how much you can contribute to a Roth IRA (or whether you can contribute at all).
If your MAGI is the following, you may contribute the full amount to a Roth IRA:
For individual filers, less than $138,000.
For married couples filing jointly or qualified widowers, less than $218,000
If your MAGI falls within the following areas, you are eligible to contribute less to Roth IRA accounts:
$138,000 or more for joint filers and less than $153,000 for single filers
For married couples filing jointly or qualified widowers, $218,000 or more but less than $228,000
If your MAGI is, then you cannot contribute to a Roth IRA.
A minimum of $153,000 for individual filers.
$228,001 or more while filing jointly with a spouse or if you’re a qualifying widower.
Pros and Cons of Self-Directed IRAs
With self-directed IRA investments, you can be very inventive. By purchasing shares in a real estate investment trust (REIT), for instance, you can indirectly invest in real estate with regular IRAs.
A self-directed IRA, on the other hand, enables you to actively buy and hold investment property inside the IRA.
The drawback is that there are more regulations for real estate ownership in tax-advantaged accounts than there are for regular property ownership.
You and your family cannot reside on the property since you are not permitted to get any profit from real estate held within an SDIRA.
Additionally, cash from the IRA must be used to cover any repairs or maintenance. Therefore, the money for the repair must come from the IRA, for instance, if you need to replace the front door.